German author Ulrich Sendler is an authority on the fourth industrial revolution, also known as Industry 4.0. His book Industry 4.0, Managing Industrial Complexity with SysLM, one of the first on the topic in Germany when it was published in 2013, became a bestseller in China. The Chinese translation, which came out in 2014, has sold more than 200,000 copies so far.

Sendler is a pioneering thinker on digitization and the Internet of Things. In 1995, he founded the Sendler Circle for exchanges on trends in software system development, which has meanwhile evolved into an authoritative organization in the field of Industry 4.0. More than 40 companies, including such industrial heavyweights as Siemens and SAP, belong to the Sendler Circle.

Sendler spoke with CommonWealth Magazine at his home in Munich in early June. In the exclusive interview, he pointed out that Industry 4.0 is not just about automation, but is actually a paradigm shift in doing business. Under the new business model, services play the main role, and products are only vehicles for delivering those services. Corporate leaders need to recognize trends and muster the courage to face them.

The following are excerpts from the interview:

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CW: How is Industry 4.0 being perceived and implemented in Germany? I am asking this question because in Taiwan many people think that Industry 4.0 equals automation and unmanned factories, that it is about replacing workers with robots. But isn’t Industry 4.0 more than just advancing manufacturing processes?

Ulrich Sendler: That’s one of the points where I have big discussions with many others, other experts, because in Germany we were focusing on automation for 30, 40 years. The German industry was doing a good job there, and they have wonderful digitization of this part of the value chain, which is focusing on producing and production planning. Now, some of them are still focusing on this automation side and don’t see the necessity to see that they have to do more than optimizing what they already did for the last 30 or 40 years.

It’s difficult…in Germany we are good at engineering, and engineers love to dive deep and to dig deep and to go deep into what they are trying to solve, and they don’t see the whole thing and are not focusing on the business that’s coming behind, so we were used to having good products, perfect products that made their way to the world.

Everybody said, “Made in Germany, that’s good quality.” That’s true, but now it’s a different thing, because it’s the Internet of Things, and the products have to go into Internet, and the most important thing will be the service that’s coming with them. So I guess you are right; it’s not only production and automation, but that’s a hard discussion still in Germany.

Upending the Traditional Value Chain—Products as Service Delivery Vehicles

I’m thinking that Industry 4.0, or this whole Internet of Things, is changing the way industry is thinking and working. And it’s coming from the end [of the value chain]. In the beginning, in the early days of industrialization, it was the other way round; it was always the way of producing something that was changing the world. First the steam machine, then the production line, then automation.

Now it’s going a different way. It’s coming from the user, from the Internet, so it’s coming from where the product is already in use, it’s done back to the service, back to the production and engineering. The kind the value chain is working is changing, and this is making it necessary for industry to understand that it’s [automation is] not good enough.

You can do the best automation in the world, like Daimler or BMW, but in those cases the data flow stops when there’s the start of production. You are producing data for the BMW, procuring, engineering…you’re simulating how the car will be running, you are testing all the components of the car, and some day everything’s done and the car is released and is going to production, and that’s the point that the automobile industry calls start of production.

And at that point, engineers are not thinking any further; they don’t have anything to do with that again. That was until now, and the car is delivered to the customer, and if you want to know how many cars of [or] which kind of car from Volkswagen were involved in that trouble thing last year, they are not able to tell that. It took them weeks or months to find out; they could not say, “Well, just let’s push the button and we know,” because we have all the data of the car; they don’t.

At the moment, the utilization [of data] is more or less concentrating on production because that was the most important thing in the past. But in the future you will need those data in the Internet for connecting the cars, for services, for apps, for everything, for testing how the car will work as a connected car.

That’s not possible with the data flow the automotive industry has at the moment. And that’s true for all the industry; they all have to change the way they are developing their products in a way that they have a totally consistent dataflow from the concept to the use in the Internet. There’s no [such] company today.

Q: Maybe German companies think they’re living very well,[so] why bother to do more?

A: That’s exactly true, especially for the small and medium companies. There are hundreds and thousands of companies that are world market leaders, hidden champions. They say, “Well, why do you tell me what to do, why? I don’t see in the next five to 10 years any problems coming up.” And they can’t imagine how fast development can change, and yeah, that’s the point. But you have to make a difference between the big companies like Siemens, SAP, ABB…these three will be having a chapter in the new book, and smaller company like those in the cluster “it’s OWL”.

Facing the Challenge, SMEs Teaming Up

Smaller companies, they have bigger problems to define their role in Industry 4.0, and the big companies are doing a good job; they are far ahead of the smaller ones. Also, most of the projects on platform Industry 4.0 are led by the big companies, not the small ones.

I think they [SMEs] know it’s coming; they don’t have a chance to avoid it. They will have to react, but they are trying to make it as late as possible, wait and see what the others do.

Q: Are there some examples of SMEs taking action?

A: The best example is “it’s OWL”, which I will present in my new book. This is the best example how small and medium businesses are able to to do without the money of the big companies.

They are in total about 150 companies, but it is a very special region. OWL stands for Ostwestfalen-Lippe. It is a special region, it is in the northeast of Germany. “It’s” stands for intelligent technical systems. In this cluster there are a couple of research institutes, from Paderborn the Heinz Nixdorf Institute, and they’re trying to do some things that normally only a very big company could do, or some research institute. But the research institutes normally don’t have the money. So now it’s coming all together.

For example, it’s OWL made a comparison between different reference architectures for Industry 4.0, like the reference model from platform Industry 4.0, like the Industrial Internet reference architecture from the IIC, like the IoT platform from SAP and like some others, so five or six, and they compare those reference architectures: How good are they to use for their members in the cluster, what’s the practical use? At the same time, they went to their members, two important members in the cluster, [and asked] “How do you think about this reference architecture, what do you think, which part of it could you use and how good it is for your practical work?”

That would be something nobody would do; a research institute would not be able to do such a study because nobody would pay, and a big company doesn’t need that because they are setting the standards.

These small and medium businesses are using this cluster for technology transfer from the research to the practice, and they are organizing projects with this cluster…at this time I think it’s about 47, but it will be more than one hundred till the end of this year…projects which are totally focusing on intelligent technical systems.

So they are putting their needs together and are developing some technologies that they think would be fitting their needs best. The cluster is like a collaboration network for small and medium businesses.

Q: In the end they may come out with some applications and solutions?

A: They already have some products that are on the market. From this cluster there are a couple of projects that are in this platform project listed, and there are some that are already market-ready and in use. Like, how can I organize my machines for producing in a way that they automatically optimize themselves, self-optimization for machining, something like that; they are developing applications and software for that.

Q: Is this the only regional SME cluster that is trying to go for Industry 4.0 in Germany?

A: At the moment there are some more coming up, in Bavaria, in North-Rhine Westphalia, in Baden-Württemberg, so there’re some other regions trying to do something similar, but they’re years behind.

Q: Do you have more examples aside from it’s OWL?

A: There are a couple of examples like Kaeser compressors…they started, they did it with SAP, SAP was helping them; first they were starting to have predictive maintenance and to offer predictive maintenance to their customers. Then they saw, well, if we know what is the best way to run these machines, we could just sell compressed air instead of selling the compressors.

They started with service, changing the service to predictive maintenance and over the service coming to a new business model that says, well, we don’t sell products, we sell services, and on this way they changed their way and methods of developing their compressors.

Today, the engineers are, for a quarter of their time, 25% of their working time in the company, they’re sitting together with the people from the service and let them tell them what’s needed, because the service people know best how the products are working and what’s needed and where are problems. This is a big change because 10 years ago, 15 years ago, you would not find any company, I guess nowhere in the world, where engineers were talking to the service people, because you were developing something, and then it was produced, and after that came the service.

And if the service came to the engineers and said: “What are you developing?” They would say, “Wait, wait…if it’s done, it’s done and then it’s your thing.” And then they had to find out what did they do, where is it documented. And they tried to work up and find out what kind of data could they have.

But today it’s going a different way; the service people are talking to the engineers directly, and they are using the data from the engineers for their service, for the use of the product at the customer side…that’s the big change, and that will be something that will happen, I guess, in all of the industry.

And then there is one of the big wheel manufacturers; they’re thinking about changing the business model [to] how to sell miles instead of wheels. They’re focusing on the fleets in the logistic, so it’s different if you buy some wheels for your own car that are used for a couple of years or if you have company that has 20, 30 trucks with big wheels that are very expensive… so they are focusing this concept on those [logistics] companies.

Q: Isn’t this is a concept like leasing?

A: Yes, and that’s why I think one should not think that Industry 4.0 is exactly this kind of model. Because this is only one business model; you could have it before now, you can do it better, you can use that data are served by the wheels or by the compressors, and you can do a better job, you can better convince the customers to use the service. But it’s not something new. It’s like leasing; you had this business model before. But the more data you have, the more you will be able to think about which is the best model that you can use for your company.

Change or Die? Thinking Up New Services

But there are more things that are not yet to be seen: business models, new kinds of services, for example, some companies that are producing elevators…some consultant companies were telling them to take care, there are some Chinese vendors of services coming up and putting some little device on the outside of the elevator, and they are able to listen to the noise that’s coming from the doors of the elevator; they’re listening to the noise that’s coming from the motor, from the engine, and they are registering something that could have some consequences, so they are starting to deliver service without being the vendors of these machines.

This way, the elevator producer is starting to think about his concept, if he should be the one changing his service to the customers.

There are some things coming up with all the sensors, actors, cameras and everything that you can put into the products now; you don’t need the data from the vendor. If you are the producer of these things, you have a data at home, the engineering data from your engineers, from the developers, from the simulation, from the tests, and you can use it to get data from the product in use, and that would be the advantage of the vendor.

So there can be now third party service providers, the more intelligent products are getting, becoming, the more it’s possible for third-party vendors to come up with services without needing to produce these things. But if you are the producer, you have the big advantage [in] that you already have the original data, and you can compare it with what’s happening outside. But it’s not that everybody is seeing that, especially in Germany.

Q: Google and Facebook are very good at using data to make money.

A: That’s different. I think it’s not possible to compare the business concept with data like Google, Facebook, Amazon and others with the concept of business models that the industry has to develop. Google, Amazon and so forth…they’re using data which they don’t have to buy anything for, ; you are giving it with your device, and you don’t want some money for it, and they don’t sell something to you for that; they just give you some apps, some possibilities to change your life, and therefore you give them your location, your preferences, your best-loved products and places in the world, your hotels, everything, and that they are selling to someone else, they are selling it to the consumer good industry.

But in industry it is completely different; no machine company would allow anybody to get their data, so Google can’t get the data from a machine. It is only the vendor of the machine who can make some appointment with the user, and he has to find out what kind of service he can offer to this user, not to anybody, not to the consumer goods industry. So there’s a big difference between data of the industry and data of people like you and me used by the mobile phone industry.

Q: So the manufacturing industry is still at an advantage in that regard?  

A: Yes, but like I told you, especially in service, there can be many ideas for some small startup companies; you just need a laptop and some good ideas and a little bit of programming knowledge, and you can do some app, and you can offer that to somebody who is the customer of a different company.

You can go between that and say, well, it’s fine, you bought this machine from this guy, but I offer you a better service than he does because I understood what’s your need. You don’t want that machine to stand still for many hours and many days possibly if the service comes too late. We found out earlier because we know how to do that; we don’t need the data from the manufacturer.

English transcript of the interview edited by Susanne Ganz

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About Ulrich Sendler

♦ Year of birth: 1951

♦ About it's OWL